Profit sharing?

Make sure all assumption are confirmed.At $1300/month per side total ARV should not exceed $260K unless you can flip it at a profit.

We ended up profiting a little over 10k, but I really feel the lessons learned will benefit us so much more! 

Rules for FHA may be different, but as long as you pay yoru captial gains tax on profit who cares how long you have owned it?  

-When this house I’m living in now was a rental rents were high enough after 3 years that it shows a profit even on paper (cash flow about $700 a month).

Assuming you are getting cash out, since you stated as such in your first paragraph, I think this is a no brainer...once you look at 2 numbers:1 - Added cost out of pocket (higher closing costs) for lower payments = $21,0002 - Added cash out with lower payment option = $3,0003 - Total added cost (cash out of pocket) for lower pmt option = $18,000      Note:  This is money you have to recover before you are making any profit...so the added cash flow isn't a plus until this money is recovered.4 - Monthly savings (added cash flow) = $1655 - Number of months to added cost recovery = 109...or 9+ years. 

Student rental profits and headaches are high.

You’d be giving yourself some time to build equity (from both market and forced appreciation) and allowing for some (likely) increases in rental rates before turning it loose as a rental.In turn, you are giving yourself a much easier path to profit; whether it be through a sale or monthly cash flow.

When he moves out at some point we'd split all profits.

I have always thought it would be extremely profitable to own homes on Lake Chelan as either rentals or Air BnB’s.